Rapid-fire card ‘apping’ may pay in the long run, but cost in the short run

This post originally appeared December 4, 2014, on CreditCards.com as “Opening 3 cards at once dings credit score, short-term

By Barry Paperno

Dear Speaking of Credit,
Hi, I am looking to open up three credit cards, but before I do, I would like to know if that will hurt my credit. I currently have two that I am not using ($0 balance) and one that I am using has a very low balance also, and one “finance card” I applied for with Apple to pay for my computer (also $0 balance). I have in total four credit cards before the three I am looking to open. What are your thoughts about opening three credit cards at the same time, or within a week’s time? Thank you so much for your help!! — Yen

Dear Yen,
There are some changes to your credit report, such as late payments, high credit card balances, and bankruptcy that are never good for your credit score. Though there are some differences among them in terms of severity and time required to fix the damage, there are no scoring benefits — long or short term — when negative items such as these hit your credit score.

Then there are some changes that are almost always good for your score, such as current payments and balance reductions, no matter how many ways you slice and dice the data.

And then there are actions that can be both good and bad for your score, depending on such short and long term credit goals as a car or home purchase. This is where the subject of opening new accounts enters the picture.

More often than not, the immediate net effect of adding new accounts is a lower score. Yet, in the longer run — six months to a year — the result of having added new cards can be a higher score than would have otherwise been achieved, thanks to the lower credit utilization (individual and combined card balance/limit percentage) that often occurs when the amount of available credit increases. Credit utilization affects your score both on the individual and combined account level, such that even if your combined utilization percentage is low, having any highly utilized cards within that combination can keep your score from being as high as it can be.

Three scenarios
To best explain, I’ll run through some examples. While you haven’t told us the credit limits on your four cards, for demonstration purposes let’s say the one card on which there is a low balance also has a low credit limit. We’ll also say that the card has been maxed out with a $300 balance/$300 limit and that your other three cards are open with zero balances and $300 limits. Then we’ll see what the addition of three new cards might do to your combined credit utilization percentage.

Example 1: Current scenario
Card 1 Card 2 Card 3 Card 4 Combined
Balance $300 $0 $0 $0 $300
Limit $300 $300 $300 $300 $1,200
Utilization 100% 0% 0% 0% 25%

In example No. 1, while your combined utilization of 25 percent isn’t bad, it can be improved. More importantly, in the current scenario your score is going to suffer from that 100 percent individual account utilization on Card 1.

To illustrate how your combined credit utilization could be reduced by doing nothing more than adding three new cards, we’ll use the existing examples and add three cards, also with $300 limits and zero balances.

Example 2: Adding new cards
Card 1 Card 2 Card 3 Card 4 Card 5 Card 6 Card 7 Combined
Balance $300 $0 $0 $0 $0 $0 $0 $300
Limit $300 $300 $300 $300 $300 $300 $300 $2,100
Utilization 100% 0% 0% 0% 0% 0% 0% 14%

In example No. 2, while still having that problematic Card 1 at 100 percent utilization, the addition of these three new cards has improved your combined percentage by 11 percent (25 percent minus 14 percent). It could improve even further with higher limits on any of the new cards.

In the next, and last, example, we’ll see how, in addition to adding three new cards, your individual account utilization could look better had those $300 in charges been spread out among a few cards rather than just the one.

Example 3: Spreading the balance
Card 1 Card 2 Card 3 Card 4 Card 5 Card 6 Card 7 Combined
Balance $100 $100 $100 $0 $0 $0 $0 $300
Limit $300 $300 $300 $300 $300 $300 $300 $2,100
Utilization 33% 33% 33% 0% 0% 0% 0% 14%

In example No. 3, we see that owing the same amount, but charging smaller amounts on three different cards can also help your score through lower individual account utilization, though you can also accomplish this without adding any new cards.

Now for the bad news. As I said earlier, any time a new account is added to your credit report, whether it’s a credit card, auto loan, mortgage, or any other type of account, you can expect your score to drop at least slightly, despite any lower individual or combined credit utilization achieved by increases in available credit.

Keep in mind that in addition to three new accounts appearing on your credit report you can expect three new inquiries further impacting your score for the first of the two years all inquiries remain on your credit report. Unlike multiple mortgage, auto and student loan inquiries that are treated as a single inquiry when incurred within a narrow time frame, the scoring formula is not so forgiving of credit card inquiries, as each one can potentially affect your score.

The general reason that scores are designed to drop with the addition of new accounts is that research into consumer behavior has consistently shown that consumers who have opened new accounts recently tend to be at greater risk of default than consumers who have not.

It’s impossible for anyone to accurately estimate how many points you can expect to lose from opening new cards without knowing your current score, utilization percentages, length of credit history and many other factors. Don’t sweat it too much, though: New accounts make up just 10 percent of your score. And while the amount of the score drop can vary, a piece of good news within the bad is that you can expect to recover any lost points from new account openings within six months to a year — assuming you pay on time, keep your card balances low and don’t open any more new accounts.

So, while I can’t recommend either way, I will conclude by strongly suggesting that if you plan to buy a home within the next year, do not open any new accounts, as you’ll want your scores to be as high as possible to qualify for the best mortgage rates. And as to whether you should open three new cards the same day or a week apart or even a month apart, the same impacts to your score will apply — just over a slightly extended period of time.

I hope this information has been helpful and I wish you the best!

Have a question or comment?  Let’s hear it!

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